Where’s the due diligence from financial institutions when it comes to property losses on residential and rental investments?

Throughout my career, I have always been amazed about the fact that financial institutions like mortgage companies, banks and credit unions, all who have a stakeholder’s interest in a property, (either through a mortgage or some type of financial interest or obligation) never seem to question a claim payment made by an insurance company following a loss. I realize they are in a unique position, either as an additional insured, lien holder, mortgage holder, bankruptcy receiver, etc., and their client, the insured, is supposed to be on the frontline looking out for their own financial wellbeing.  But it’s their security interest or in some cases a fiduciary responsibility that is at stake. So you would think they would have more than just a passive interest to confirm that a settlement on a property loss is correct and payment is in accordance with the policy and the facts of the loss. Of course, it’s in everybody’s interest to ensure proper repairs are made to restore the property to its pre-loss condition. From my experience, an inspector may be sent out to make a cursory inspection or the insurance company’s repair contractor’s estimate is accepted as fact regarding the facts of the loss, the coverage and how the loss was adjusted. This is not what I would call due diligence or good business!

What got me thinking about this was a recent visit to a client down in the Caribbean. A few years ago following a hurricane, claims were made and damages were calculated.  Unfortunately for this client, a dispute arose between heirs to the property after the owner passed away and thus management of the property was placed in a court appointed administrator’s hands, who was domiciled on another island far removed from the adjustment facts and issues. As a result, the administrator accepted the first check issued by the insurance company as full payment.  Sadly, one of the heirs to this resort has since learned that the insurance company was prepared to pay many thousands of dollars more.  It became a six figure savings for the insurance company and a big loss for the property owners.

Remember, adjusting is part art form.  Who does it, and how it is done determines the outcome and the amount of a payment. It is all about the coverage, the scope of the loss, and the accuracy of the cost estimates. So you would think that with so many variables, (any one of which can roll over into some big money differences) that someone with a fiduciary duty would at least ask for a second opinion or question the process and or payment.

The Great Recession is another example of this lack of due diligence. Thousands of properties were foreclosed on and former owners filed bankruptcy, none of which stopped property damage from occurring. Banks, credit unions, bankruptcy judges and court appointed receivers are all on the line for some criticism because they for the most part appear to accept whatever the insurance companies’ claims adjuster report say is owed. Are they always right? Of course not.  But how do you know how close to right they are unless you get a second opinion?

While the Great Recession may be over for some, we now have a number of hedge funds and other financial types trying to capitalize on depressed property prices.  Large positions are being taken in the residential housing markets across the country with overhead requirements being met by renting the properties.  Make no mistake about it, renters not only increase the wear and tear factor but also likely contribute to the moral hazard risk, since they do not own the property.

I wonder what the big chiefs in hedge-fund land are doing to make sure every penny owed following a property loss is recovered?  Or are they just going to take what they can get as a settlement? I don’t know about you, but I would be all over the details of my loss to make sure it is right. It’s not only called due diligence but good business practice.

If you have questions regarding any property insurance related issues, please call 800.321.4488 or contact us to submit a question to one of our public adjuster or loss assessor experts.

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"On Property" Insurance Claim Tips Blog

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